CRISIL Ratings estimates that airports in New Delhi, Mumbai, Hyderabad and Bengaluru, which cater to nearly 55 per cent of India’s air traffic, and which are operating near-full capacity, will need to spend heavily on expansion through 2021. Yet, their credit quality will remain healthy because of business model strength backed by robust traffic growth and predictable cash flows under a regulated tariff framework.

Airline passenger traffic in India grew 20 per cent in fiscal 2017, which was a big leap over the sedate 9 per cent average seen since 2011. Bengaluru and Hyderabad airports have clocked even faster growth of over 24 per cent. Rising private consumption and healthy economic growth would continue to provide tailwind to traffic growth at airports.

Says Gurpreet Chhatwal, President, CRISIL Ratings, “Because of surging footfalls and high capacity utilisation of over 90 per cent, we estimate the four airports would need to invest Rs 27,000 crore for expansion. Yet their credit quality will not suffer because of low implementation risk – such expansions are brownfield and modular in nature – and conducive tariff regulation.”

Tariffs such as passenger user fee levied by airports is calculated in blocks of five years (called ‘control periods’) based on a fixed return on capex and base traffic growth assumption. This not only compensates for the risks taken, but also provides for adjustment in user fee on account of any large variation in traffic, or capex plan in a control period.

Regulations also have had a balanced approach. For instance, a ‘hybrid-till’ mechanism encourages airport developers to increase their non-aeronautical revenues through retail, advertising, and parking. At the same time, it also benefits passengers because the passenger user fee is subsidised by a portion of non-aeronautical revenue.

As traffic increases rapidly, aeronautical revenue streams from passenger user fees and landing and parking charges would also increase in the ongoing control period.

Manish Gupta, Director, CRISIL Ratings, says, “While aeronautical revenues may moderate in the next control period due to adjustment in passenger user fee, increasing footfalls can offset this through higher non-aeronautical revenue so it’s unlikely to curb the earnings’ momentum of these airports. The contribution from non-aeronautical revenue is expected to increase to ~50 per cent over the next four years from ~35 per cent now.”

Such unique characteristics make airports a prized infrastructure asset class that enjoys much lower risks compared with roads, power generation, and distribution. Risks are also lower because of pricing power emanating from operational exclusivities, low complexity of operations, and ability to raise resources by monetising contiguous land parcels.

That said, liquidity retention will be essential to offset any sharp fall in cash flows – most likely from macroeconomic shocks. That’s because traffic growth is elastic and correlated with ticket prices. Any sudden rise in oil prices can make tickets expensive and result in lower-than-expected traffic growth, and thereby lower cash flows in a control period. Another key risk is timeliness in the tariff setting process and increasing regulatory scrutiny around expenditure. So, differences in recognising capital costs could potentially lower tariffs and hence returns.